Registered Retirement Savings Plan’s (RRSP) are still a great way to invest if you are earning higher income now than you will after your retirement. RRSPs are part of your long-term planning for your life after work, and are of limited value in the short term unless your are anticipating a large change in your income level sooner rather than later.
The key is determining the difference between the rate at which your income is taxed now, compared with the rate it will be taxed in the future. Alberta now has increasing tax rates on higher incomes and they are indexed to inflation, . And the tax brackets for provincial and federal income taxes are different from each other. The combination of these two factors makes a definitive answer to “how much tax will I save if I contribute” a bit of a moving target. When you are considering making a contribution, contact us and together we can determine a reasonably accurate figure based on your income for the year. As a rough example, if you are earning $126,625 or above in Alberta, your tax savings on a $10,000 contribution to your RRSP would be $3,800. (See 2017 Tax rates in Alberta)
If you are thinking of storing some cash now for use within a couple of years, then a TFSA would be a better option. What you earn inside your TFSA is not taxed, however the money you put into the TFSA has already been taxed. So unlike the RRSP there is no up-front saving to be had in the TFSA.
If you are thinking forward to your retirement years when your taxable income will likely be substantially less, then the RRSP is the way to optimise your savings. The difference between the tax rates now and then will almost certainly be more than anything you can earn on an investment these days, and you get the added benefit of making tax free money on your RRSP investment as well. But you need to be patient.
